Expanding
the Home-Office Deduction
Thanks to technology, more and
more people go to work without ever leaving their homes. And, thanks to The
Taxpayer Relief act of 1997, an increasing number of those work-at-home
employees may qualify for the home-office deduction in 1999. If you use a
portion of your home for business and your home office meets the IRS’s
requirements for claiming the home-office deduction, you may be able to deduct
certain expenses, including rent or depreciation, mortgage interest, real estate
taxes, maintenance, and utilities.
Background
A few years ago, the Supreme
Court effectively eliminated the home-office deduction for many people when it
ruled that an anesthesiologist who used a home office for business did not
qualify for the home-office deduction. The Court concluded that the doctor’s
home office was not his principal place of business since he actually performed
his services in hospital operating rooms. As a result of that decision, which,
in effect, concluded that your principal place of business is where you spend
most of your time or where you earn income, it has been difficult for many
home-office workers to meet the principal place of business test.
New Qualify Rules
The new home-office deduction
rules that went into effect earlier this year contain a more liberal definition
of your principal place of business. Under the Taxpayer Relief Act of 1997,
starting on January 1, 1999, a home office qualifies as a principal place of
business if both: (1) the office is used by the taxpayer to conduct
administrative or management activities of a trade or business and (2) there is
no other fixed location of the trade or business where the taxpayer conducts
substantial administrative or management activities of the trade or business.
Administrative and management activities might include scheduling appointments,
billing, ordering supplies, and bookkeeping.
This change is likely to be a
great help for workers like plumbers, musicians, outside sales representatives,
and others who perform their services outside their offices but do their billing
and carry out other business-related tasks from a home office.
The fact that you may conduct
management activities in a non-fixed location, such as your car or hotel room,
will not cause you to forfeit the deduction. Similarly, conducting some
management activities in another fixed location of the business does not mean
you lose the deduction, as long as those activities are not substantial.
The other requirements for
qualifying as a home office remain in effect. The space you designate as your
home office must be used regularly and exclusively for business. (In the case of
an employee, that use must be for the convenience of your employer.) Bear in
mind that occasional or incidental use of a home office will not satisfy the
regular use requirement even if the space is used exclusively for business.
Exclusive use means that the space you designate as your home office may not be
used for any personal or family activities that don’t meet the home- office
requirements. There is an exception to the exclusive use requirement if your
home space is used for storing inventory or product samples of a business
selling retail or wholesale products. Your deduction is limited to your income
from your business activity.
Selling Your Home
Unfortunately, the news is not
all good for home-office owners who sell their homes. When a portion of your
principal residence is used as a home office and you have taken a home-office
deduction on your tax return, you may lose part of another tax benefit. For
homes sold at a gain on or after May 7,1997, that portion of the home on which
you claimed depreciation does not qualify for the home-sale exclusion of
$500,000 ($250,000 for single filers). Instead, the depreciation you have taken
is recaptured at the rate of 25 percent.
Many people fear that deducting a home office is
akin to waving a red flag at the IRS. Although taking the home-office deduction
may somewhat increase your chances of an audit, you should not let that dissuade
you from taking the deduction if you qualify.